Feb 26, 2020
Operator
Good morning, ladies and gentlemen. Welcome to the Kinaxis Inc., Fiscal 2019 Fourth Quarter Conference Call.
At this time all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session.
Instructions will be provided at that time for you to queue up for questions. I’d like to remind everyone that this call is being recorded today, Wednesday, February 26, 2020.
I’ll now turn the call over to Rick Wadsworth, Vice President of Investor Relations at Kinaxis, Inc. Please go ahead, Mr.
Wadsworth.
Rick Wadsworth
Thanks, operator. Good morning and welcome to the Kinaxis earnings call.
Today we will be discussing our fourth quarter results which we issued after close of markets yesterday. With me on the call are John Sicard, our President and Chief Executive Officer; and Richard Monkman, our Chief Financial Officer.
Before we get started, I want to emphasize that some of the information discussed in this call is based on information as of today, February 26, 2020, and contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements.
For a discussion of these risks and uncertainties, you should review the forward-looking statements disclosure in the earnings press release as well as in our SEDAR filings. During this call we will discuss IFRS results and non-IFRS financial measures.
A reconciliation between IFRS results and non-IFRS financial measures is available in our earnings press release and in our MD&A, both of which can be found in the Investor Relations section of our website, kinaxis.com and on SEDAR. Participants are advised the webcast is live and is also being recorded for playback purposes.
An archive of the webcast will be made available on the Investor Relations section of our website. Neither this call nor the webcast archived may be rerecorded or otherwise reproduced or distributed without prior written permission from Kinaxis.
To begin our call, John will discuss the highlights of our quarter and year, as well as recent business developments, followed by Richard who will review our financial results and outlook. Finally, John will make some closing remarks before opening up the line for more questions.
I’ll now turn the call over to John.
John Sicard
Good morning and thank you for joining us today. I'm pleased to report that our fourth quarter results were very strong across the board including SaaS revenue growth of 26% to $32 million, total revenue growth of 47% to $56.3 million, and adjusted EBITDA 32% of revenue.
As a result, we met or beat our annual guidance for all of these important metrics. Key accomplishments included growing full year SaaS revenue by 22% to $119 million and achieving an adjusted EBITDA margin of 30% for fiscal 2019.
These results were driven by a record number of new customer additions including the recently announced wins at Lundbeck, a leading European pharmaceutical’s company. Dr.
Reddy’s Laboratories, another leading pharma company and our first customer in India. Our success this past quarter is in large part the direct result of investments to significantly expand our sales and marketing teams across 2018 and throughout 2019.
Given the strength of our markets we will continue to increase these investments through 2020. While new customer wins are critical, our land and expand strategy is also focused on extending and expanding our relationships to existing accounts.
Last year we continued this strategy through renewals with several major existing customers including Unilever, Schneider Electric and Merck. To support our renewal and expansion efforts and as previously communicated we have built dedicated sales team that is solely focused on serving the needs of our installed base.
Our success in 2019 was also increasingly driven by our relationships with partners, who not only influence the significant majority of our new wins for the year, but continued taking ever increasing roles in our deployments. We now work with approximately 25 partners globally.
Recently, we have announced relationships with Syncronic in Denmark, ABeam Consulting in Japan and Bluecrux in Belgium. Developing key partners around the globe continues to be a long-term strategic investment that involves education, training and joint commitment on the sales and services side.
We believe that our global alliances strategy is instrumental to scaling the business and we will continue our investments to strengthen these relationships through 2020. Growth in our customer base and our alliance partners also needs to be supported by growth in our own internal customer care and professional services capabilities.
I'm very pleased to announce that we have recently acquired long time business partner Prana Consulting. Prana is an India based rapid response consultancy with oversetting professionals including a team in California.
Over the past 15 years, they have supported and continued to support many successful customer deployment. Now, we will be instrumental in providing us the necessary scale in delivering services and customer care for our ever growing customer base in Europe and Asia.
We ended the year with an outstanding backlog of committed subscription business. Our multiyear SaaS revenue backlog was up by 40% from just one year ago, which will help underpin our growth for 2020 and beyond.
Our strategic investments are clearly paying off and we see market conditions that continue to strengthen. As a result, we anticipate SaaS revenue growth in the 23% to 25% range for fiscal 2020 and foresee an ability to sustain this higher rate in the mid-term.
Let me share with you some of the reasons why we feel that the market and our position in it is strengthening. First, events that are wildly disrupting supply chains globally continue to shine a light on the need in the concurrent plan.
From tariffs, Brexit to the recent coronavirus crisis, the need for planning in real-time has never been more evident. We are seeing opportunities emerge from some of these disruptions.
Secondly, our market just like the investment community has never been more focused on the issue of sustainability. RapidResponse is core to the elimination of all kinds of waste in the supply chain and customers and prospects are keen to understand the ways we can help them plan for less waste.
Third, Kinaxis is laser focused on innovation and we are hearing feedback that we're outpacing key competitors in that regard. Lastly and perhaps most broadly, there is increasing acceptance that supply chains need to go through a digital transformation.
Add testament to that, in November 2019, Gardner held their first ever dedicated Supply Chain Planning Summit targeted at the planning leadership team, which is the main audience for our unique digitally integrated and current planning approach. As a result of all these things and our past strategic investments, we're seeing interest from our core vertical markets in geographies where we now have dedicated presence.
Prospects in new countries within Europe and Asia are starting to show up this potential opportunity. Remember the sales cycles are long approximately 18 months.
So opportunities can take a while to come to fruition. But it is this reason for optimism.
The time is right to continue to accelerate our investment in people and capabilities on a global basis and across all functions of the business. With that, I'll turn the call over Richard to provide further commentary on this outlook and the financials for the quarter.
Richard Monkman
Thank you, John and good morning. As a reminder unless noted otherwise all figures reported on today's call are in U.S.
dollars under IFRS. On a comparative basis, total revenue in the fourth quarter increased 47% to $56.3 million driven primarily by SaaS revenue which grew 26% to $32 million and by the growth in subscription terms license revenue.
SaaS revenue growth results from contracts secured with new customers, as well as the expansion of existing customer subscriptions. Consistent with our guidance, we recorded $12.1 million of subscription term license revenue in Q4.
This was approximately 5 times the Q4 2018 level. As we have previously noted, subscription term license revenue varies significantly quarter-to-quarter and year-to-year simply as a result of the timing of the individual underlying renewal date for subscriptions hosted by our customers on their site.
Our customer-hosted subscription agreements are generally three year commitments that follow our renewal cycle whereby 2019 was at the peak and 2018 below. Given our current customer base, we expect this three year pattern to continue with the next peak anticipated in 2022.
Professional Services revenue grew by 20% to $8.9 million compared to Q4 2018. Professional Services revenue is driven by a number of factors including the number, size and timing of customer projects underway, as well as the level of deployment support being assumed by our partners.
Overall, we remain pleased with diversity and strength of our revenue base. For the year, our 10 largest customers accounted for 32% of our total revenues with no individual customer accounting for greater than 10% of total revenues.
Gross profit grew 60% to $41.4 million or 74% of revenue compared to 68% of revenue in Q4 2018. This increase results from the growth in SaaS and subscription term license revenue partially offset by an increase in cost of revenue.
Profit grew by 168% during the quarter to $7.8 million or $0.29 per diluted share compared to $0.11 per share in Q4 of 2018. Adjusted EBITDA for the fourth quarter grew 102% to $18.1 million or 32% of revenue compared to 23% in Q4 of 2018.
These results were due to an increase in revenue and gross profit partially offset by an increase in operating expenses including investments to support our long-term strategic growth initiatives. Q4 cash from operating activities was up 21% to $8 million largely due to higher profit excluding non-cash items, partially offset by fluctuations in operating assets and liabilities including a larger increase in trade and other receivables compared to the same period in 2018.
As at December 31, 2019, cash, cash equivalents and short-term investments totaled $212.6 million, an increase of $31.1 million from $181.5 million as at December 31, 2018. Full year 2019 results included total revenue of $191.5 million, up 27% from 2018.
SaaS revenue of $118.9 million, up 22%. Description term license revenue of $26.2 million, up 164%.
Adjusted EBITDA margin of 30% compared to 28% in 2018. Our minimum contracted revenue backlog has strengthened considerably as noted by John.
As of December 31, 2019, it was $339.4 million as detailed in Note 13 to our financial. This amount includes $310.6 million of SaaS revenue backlog.
The backlog will be recognized over the following period. A $137.8 million will be recognized in 2020 of which a $122.1 million relates to SaaS business.
$101.1 million will be recognized in 2021, of which $91.8 million relates to SaaS business and $1.6 million will be recognized in fiscal 2020 2022 and thereafter of which $96.7 million relates to SaaS business. Total bookings in Q4 were $97.1 million of which SaaS bookings were $95.7 million.
We are very pleased with this continued strong performance driven by several new customer wins and a significant customer renewal activity. As you know given the nature of our large enterprise sales model bookings will vary between periods depending upon the timing of new customer wins and customer renewal schedules.
Based on this backlog strengthening market conditions and our own expanded capabilities we are pleased to initiate guidance for fiscal 2020. We expect the total revenues will be in the $211 million to $250 million range.
As to the key components of total revenue we expect SaaS revenue growth to approximately 23% to 25% of fiscal 2019 levels. We expect professional services revenue due to both organic business growth and our product acquisition to grow in the 20% range.
We further expect that our partners will continue to expand their deployment activity with Kinaxis. As communicated last year for 2020 we expect subscription term license revenue will be approximately half the level of 2019 or in the $12 million to $14 million range.
Regarding the timing of this revenue within 2020 we expect approximately one third will be recognized in Q1 and approximately 40% in Q2. Again the anticipated fluctuation in this revenue is simply a result of the timing of the individual customer posted renewals, which follow a three year cycle.
We expect maintenance support revenues values to be relatively stable and in line with a level of 2019 or in the $12 million to $13 million range. This revenue is almost entirely related to the residual portion of a customer-hostess subscriptions and because it relates to ongoing support, it is recognized readably over the full customer subscription term Regarding our investors for 2020 as John mentioned, we continue to be encouraged by a number of factors including significant backload, greater capabilities of our expanded global team and in general market conditions.
Consequently, we are expanding our investments globally in a number of areas and expect the following ranges expressed as a percent of revenue for fiscal 2020. Cost of revenue representing Professional Services, datacenter and support operations to be in the 29% to 31%, which would support a gross margin between 69% and 71%.
Sales and marketing expenses will be between 27% and 29%. Research and development expense will be in the range of 19% to 21% and G&A will be in the range of 13% to 15%.
Finally, we anticipate quite $14 million to $16 million of capital assets largely reflecting expansion investments in our data centers to reflect the needs of our ever growing customer base as well as our expanded R&D team. Roughly three quarters of this amount will be invested in the first half of the year.
Based on the above revenue growth and investments, we expect adjusted EBITDA for fiscal 2020 to be between 20% and 23% of revenue. This guidance reflects two key factors First the lower subscription term license revenue which is a dollar for dollar impact on adjusted EBITDA and accounts for roughly $13 million of the expected change.
Second the level of additional business investments for 2020 which are focused on product innovation and sales and marketing. As John noted we anticipate that we can sustain our SaaS revenue growth in the 23% to 25% range over the medium term.
Further while we will continue to invest in growth we anticipate the total OpEx growth rate will be lower after 2020. Consequently we expect adjusted EBITDA margin will return to levels similar to 2019 in fiscal 2022 once we reached the anticipated peak of our three year subscription renewal license cycle.
To help you understand the accounting for subscription term licenses we have posted a hypothetical example of IFRS 15 revenue for a customer hosted subscription agreement in the financial sections of our IR pages of our webpage. As always we will continue to assess our business and market conditions and we'll update our outlook as appropriate.
Thank you for your continued support of Kinaxis. With that I turn the call back over to John.
John Sicard
Thank you, Richard. I’m pleased with our meaningful progress in 2019 and I’m confident in our ability to accelerate SaaS revenue 2020 and sustain that rate over the mid-term all while maintaining healthy profitability.
Our strategy to get there is largely the same is which has brought us to such outstanding to-date. We are going to put innovation first do our own work in collaboration with our alliance partners.
We believe we have our best solution available on the market today, but we are relentlessly working to prepare for tomorrow’s needs. We’re going to drive customer excellence by maximizing ongoing value throughout our customer relationships.
We believe this will create opportunities for increased retention and expansion. We're going to evolve our amazing culture globally.
The sense of pride that exists in our company today and our corporate goals will extend everywhere we have people, as we continue to attract and retain a world-class talent globally. Lastly, we will diversify our growth strategies.
Entering new markets and tackling new used cases has been a cornerstone of our growth today and we will continue to actively investigate ways to augment our revenue streams. Before closing for questions, I would like to extend a warm welcome to Betsy Rafael, who was appointed to her Board of Directors yesterday.
Betsy has over 30 years of executive financial experience in tech - in the technology industry, including senior roles at Apple, Cisco and Silicon Graphics to name a few. She currently sits on the board Autodesk where Betsy is the Audit Committee Chair and also - and has also been a director of several other innovated technology companies.
We're thrilled to have her experience and pedigree to our team. On behalf of Kinaxis, I would like to thank you for your support and as always for taking the time to join us on this call.
With that, I’ll turn the line over to the operator for Q&A.
Operator
[Operator Instructions] First question comes from Richard Tse with National Bank.
Richard Tse
Given your backlog here which is incredibly strong it looks like you guys are being quite conservative here with the guidance. Is that a correct characterization?
Richard Monkman
Well thank you, Richard. I think you're referring to sort of our general practice as long as we provide guidance of having approximately 80% of that 12-month forward view in our subscription backlog.
And based upon that midpoint of the guidance yes that sort of calculates this with the about 80% to 84%. So it is a little bit above, but I like to say it’s in the 80% range.
And so, given market conditions given where we are in the year just given the nature of the enterprise sales and the timing we feel this guidance is appropriate.
Richard Tse
And John you talked about a number of reasons why some of the prospects are looking at RapidResponse. Could you maybe give us some examples of how RapidResponse has helped some of those customers against this current virus outbreak?
John Sicard
Yes so much of it has to do with you know what I’ll say material movement and sourcing scarce raw materials. And while Kinaxis isn’t currently doing business in China we certainly have customers that have significant operations in China.
And under conditions like this like we saw under the disruptions of tariffs. Our customers are looking to run frequent simulations and course corrections based on understanding where they will have supplied risk.
And so that's where we're predominantly seeing the interest and the activity. And as I stated earlier, any disruption quite frankly in supply chain the velocity of disruption in the supply chain calls for frequent concurrent - end-to-end current planning in real time in order to navigate conditions that our customers find themselves in.
Richard Tse
And just one last one from me. You guys had a strong professional services quarter and then now you're acquiring one of your former partners.
It has seems a little bit inconsistent with your former strategies or offload some of that service revenue of your partners. So why are you making that move today - you're so busy you're doing a lot of valuations that you need that extra manpower?
John Sicard
Yes well, that's exactly - it was good timing for both parties. Our success in Europe and Asia is driving the need to scale up customer care and services at a rapid pace.
And so, we see we've been working with Prana for the last 15 years. We know them well.
Their practice has been entirely focused on RapidResponse. And so, in essence we are procuring instant scale.
And again in light of our growing business in Europe and Asia and them being largely located in India it made a lot of sense in preparing for 2020 and beyond. The other thing I will tell you is based on the skill set that we see in Prana.
We see a broader use if you will of that function. I don't look at it as buying a professional services arm.
So much as I say it I see it as buying 70 individuals with significant experience in Kinaxis and RapidResponse that could be used at a much broader level which - no again in the earlier mentioned, the notion of customer care and support being one of those functions.
Operator
Next question comes from Thanos Moschopoulos with BMO Capital.
Thanos Moschopoulos
John on the topic of the virus I mean as you mentioned, I’m sure it clearly highlights the need for software like yours. But on the flipside if customers are too busy putting out fires may that delay some sales cycles in the short-term and have you seen any instances of that or not yet?
John Sicard
Well certainly as we see these kind of macro level disruptions that I've mentioned to others whether it’s Brexit or tariffs or someone yes that can sometimes disrupt sales cycles as people turn to you to absorb that particular disruption. We have not seen that in our current sales cycles today, but certainly it's possible.
We've certainly taken that into consideration as part of our guidance. But again based on the activity that we're seeing in the field which is augmented quite frankly we have not seen that negative effect.
Thanos Moschopoulos
And then just on the overall demand environment that was struck by Genpact’s recent commentary. They said that they've seen a threefold increase in their supply chain management pipeline over the past year.
And I believe they're your largest partner among the largest partners? You might not be prepared to show any - quantitative metrics in the pipeline, but just broadly speaking is that consistent to what you're seeing?
John Sicard
Well we're certainly really happy with the both the - size of the pipeline and equally if not more so the quality of the pipeline. And the activity that we're seeing in comparison to you know the same time last year quite frankly.
And we've been telegraphing this obviously that we are investing heavily in sales and marketing. I mean the team our sales engine has more than doubled since January of 2019 and it will continue to grow.
That is the direct reflection of not only the size and shape and health of the pipeline we’re trying through activity that we are seeing in the pipeline.
Thanos Moschopoulos
Great, couple for Richard, would you be able to disclose Prana’s trailing revenue?
Richard Monkman
No, we haven't disclosed that.
Thanos Moschopoulos
And then should we assume that term licenses in 2021 will be similar to 2020 levels, if I look back at the historical pattern?
Richard Monkman
Yes, so what we had indicated was that will build out be at a lower level in 2021 than 2020. So basically 2021 would be in line with 2018.
Again this is assuming the renewals and without expansions sort of just at a run rate and then again returning to the levels that’s for the peak in 2022.
Operator
Next question comes from Daniel Chan with TD Securities.
Daniel Chan
Just to ask another question on this term license. At the beginning of 2019 - you said it was going to be half of 2020 term license going to be half of 2019 in that time that would have implied around $10 million to $11 million for 2020.
So does your current 2020 term license guidance which is above $10 million to $11 million, does that include assumptions for expansions when they renew?
Richard Monkman
Well - Dan it's really just as ongoing reflection of level of activity. And so when we were forecasting that two years ago or sort of year and a half ago, it was sort of an indication where we thought 2020 was going to be.
And we just updated that based upon current conditions. So it's about it is about - it is about the half range so that’s why the $12 million to $14 million range.
And then gain I noted a significant portion would be this quarter.
Daniel Chan
And then for the current quarter if we assume term license revenue is nearly 100% EBITDA margin that implies the rest of the business is generating EBITDA margin of about 14% this quarter and that's down from the low-20s that we saw in Q1 to Q3. So just wondered if there are any one-time expenses this quarter or if there was some sort of seasonality that we should see in Q4 of every year?
Richard Monkman
Well, there is a little bit of seasonality, just moving the subscription term license element away. There is a little bit of seasonality in that.
So for instance, we hold our very large customer - connections in Q4 and some other key marketing activities so, marketing expenses tend to be higher Q4. And in Q1, often what's happening is our budgets for customers are just being finalized, and so therefore sometimes the professional service level is a little bit lower.
The impact of new payroll taxes hits a little harder Q1 and so on. So there's some variability that's why we tend to focus on the overall annual.
And at that level we're talking about gross given the 29% to 31% that we noted for the overall cost of revenue for the full year. So, this includes the expansion of the data centers and so on that we also talked to and that approximately 70% gross profit line.
With respect to your specific question on subscription term license, it because that is really the construct where we have to allocate revenue over the three year terms to the right to use component and yet we're spreading our support over the three years. Yes.
That notion of that day one component is approximately 60% on a three-year arrangement of a full three year term is 100% you know from a current perspective really 100% margin. And so that's why you also saw the strong, strong margin in Q4 with the $12 million level of subscription term license.
So you know as we hit those numbers you're going to see that variability and the gross profit, but again you know we take this longer term view at a minimum on an annual basis. And what we're trying to do down is help people understand some of that variability from that accounting change.
But you know from the business operations side, you'll see it's quite consistent in the subscription SaaS revenue as you know it just is growing and it continues to grow quarter-over-quarter. But you'll also see that you know those ongoing expense investments in product and sales of marketing.
So, we hope that provides and our goal here today wishes to help give a better visibility through to the dimensions of our overall P&L for 2022 so that people can see that sort of three-year cycle and range is how it impacts just either.
Daniel Chan
Yes, that's I think helpful. Thank you.
And just final question for me. If I look at your SaaS backlog it kind of dips to $91.8 million in 2021, but then you have it ramping up again in $96.7 million in 2022.
So just want to help me understand why you have it kind of backlog that kind of ramps up as you move to out of years do you have expansion agreements that are already booked for the next couple of years?
Richard Monkman
It's actually 2022 and thereafter.
Daniel Chan
Oh, okay.
Richard Monkman
So while we have I would say on average our subscription agreements are three years. We did support customers with five year commitment.
This is again a minimum level so that customers with expansion privileges unless they've committed contractually to that we don't include that in backlog. So this is the minimum contracted amount.
And because some deals are greater than three years you know we break it into thereafter. So you know that's our practices try to you know provide that mid-term and unwind, if you will, as well as the overall confidence on the total backlog.
Operator
Next question comes from Stephanie Price with CIBC.
Stephanie Price
With the Dr. Reddy's contract win and the Prana acquisition announcement can you talk a bit about India as a region for Kinaxis.
And should we expect further investments in the region?
John Sicard
Life sciences as I said in the past has been you know probably the warmest and continues to be in fact you know that was a moment which they outpaced high tech electronics and I can tell you it has continued to outpace high tech electronics even today. And so as we expand our footprint in that market segment it made a lot of sense to target some of the largest pharmaceutical companies in India.
And as you know you know we have very, very strong alliance partners that have a global footprint there in every country that matters. And manufacturing is especially in life sciences and so it is you know it isn’t uncommon to get that kind of influence from partners to help us expand in life sciences beyond sort of the target geographies that we talk about most often.
Certainly the Prana acquisition helps with customer care and support and service opportunities as well being in region and local time zones with a language issues and such. So I wouldn't say that we are proactively targeting accounts outside of the geographies that we have traditionally talked about North America, Europe and Asia Pacific, portions of Asia Pacific.
We are nowhere near saturated in any vertical in any geography. And so we feel like that's where we will continue to target, but certainly be opportunistic when we see very reasonable deals in markets where we should be winning those accounts with the assistance of the wind of our alliance partners at our backs.
Stephanie Price
And then in terms of the Prana acquisition this is signal more of a focus on M&A here and are there other areas of the business that you would you are looking at building out through acquisitions?
John Sicard
Yes. I mean obviously the current condition of the business is has been the result of focus, rigor, responsible operation of the business and organic growth.
And so, when I think about acquisitions going and forever I'm forever thinking about making sure we don't poison the soup with every acquisition every - these are new ingredients into the organization. And frankly, we have a wonderful business continuing to grow organically.
Obviously with Prana personally myself have been friends and as I've known Vijay for you know 15 plus years and they've been working with us for quite some time. So culturally this was a - an extremely natural fit and the timing was exceptionally good for us given our growth in Europe and Asia.
It was just - was just very, very obviously for us to do given the conditions with the business. As it relates to you know the broader question of M&A, certainly we are you know we have our gear to the ground for things that might push you know what I call technically accretive you know things that, opportunities for us to fill wide space to support our customers and prospects beyond where we currently are.
I will tell you that you know we do these evaluations with extreme rigor knowing that Kinaxis as a company has grown and developed to be just an absolutely valuable asset as an organic growing company. So I guess it’s the best way I could describe our current condition on M&A.
I wouldn't call it a significant growth strategy for us. It's more you know we'll be opportunistic when we see technologies that can help us expand use cases for our customers and prospects.
Operator
Next question comes from Paul Treiber with RBC Capital Markets.
Paul Treiber
Just in regards to bookings in the quarter, could you speak to the magnitude of bookings for new customer wins as opposed to renewals?
John Sicard
Good morning, Paul. So yes, the back half reflects both the new name wins as well as renewals and related expansion for their customers.
We don't break that out from a backlog perspective, but our trend from an incremental revenue perspective of two-thirds being driven by new name wins and one-third by expansions has continued. We have the sales team as part of the expansion of the sales team has actually been a team dedicated to just working with existing customers and expansions.
So, we're very pleased to see that level of activity also continue to increase. But you know with the overall expansion that John noted to the sales there's and the activity there's still a lot of additional capabilities now just focused on a new name wins.
And so those two just basically continue to be working in tandem and that sort of two-thirds, one-third is continuing.
Paul Treiber
And then thinking through EBITDA margins when you look back at 2019 you did exceed the guidance you provided at the beginning of the year by about 600 basis points at the midpoint. And I think some of that was on a higher term license revenue.
Can you speak to - just as the moving parts there and then also when you look forward to 2020 what do you see as potential upside or downside drivers versus your guidance?
Richard Monkman
Yes, so you're correct we significantly exceeded our overall guidance especially from an adjusted EBITDA from especially from the initial against that we provided last year. At that point in time we had anticipated a lower level of subscription term license as it turned out.
Not only do we have a very, very strong absolute renewal rate. But with some meaningful expansions with those same customer hosted arrangements and such subscription term license revenue was higher.
In fact it represented about 13% of our overall total revenue and as we talked briefly earlier in the call that essentially implies straight down to the bottom line. So with the nature of the cycle and the revenue and they’re declining.
This year the subscription at the midpoint the subscription term license revenue is sort of in the 6%. So you can sort of see that 13% to 6% delta 7% all things being equal would low through to the adjusted EBITDA percentage.
So Paul we’re going to, we provided you and the market with our view as to that not only cycle, but the level of subscription term license that we’re currently anticipating should that change we will continue to update you. But yes, if we do have a higher level of subscription term license or specifically expansion therein that will have a positive impact on adjusted EBITDA.
Operator
Next question comes from Gus Papageorgiou with PI Financial.
Gus Papageorgiou
I mean the results are fantastic you have really good growth and very high profitability. But if I look at your business I guess the only metric that stands out as being kind of poor would be the return on equity.
Now you're kind of high single-digits, low double-digits and the key reason is because of the huge cash position. So if you look at that cash and you know what to do with it can you talk about - how will you think about you know three things.
One perhaps being more aggressive on M&A, secondly perhaps being more aggressive in investing in the business and sales channels and thirdly, issuing a dividend because I think given that you continue to pile up cash and it's just sitting there that’s probably more effective use for it?
Richard Monkman
Well thank you, Gus and in particularly for noting our very strong cash and we continue with that very, very strong cash generation. And with regards to aggressively investing in the business, first off we believe we are.
I mean we have more than double our sales capacity. In fact are well on track to extend beyond that one.
We’ve significantly increased our marketing profile. One of our Achilles' Heels as I have chatted previously as being our awareness and - that is changing and it's changing for a number of factors.
One is just the marquee names that we've been able to have the privilege of working with and I have association. And then the general recognition of ongoing disruption in the market and the importance of planning, so those things are positive.
And so you know we are now moving into that high 20% range of sales and marketing versus the mid-percentage point. We continue sustain a very strong investment in product in fact are increasing that.
We're very fortunate to have a number of strong individuals. We are expanding our capability on the service side only with our general expansion, but with the significant step up of the product capabilities to provide ongoing sustained services.
With regards to M&A, we are actually taking more I would say thoughtful approach in that with strength and management team strength in our product management capabilities, strength and our thought leadership. We are now aware of additional opportunities and we're going to continue to review that.
So, it is very much from a product roadmap perspective is it a buyer or build. But as we've stressed before, the RapidResponse is a single product.
And it is the team is so focused on growth opportunities. We need to ensure that whatever IP that we do bring in if it were by way of acquisition it is going to be immediately accretive this is going to be highly scalable and quite frankly that has been a challenge.
We are continuing to pursue and review opportunities. But, we were not a company where we're going to be buying at least at this juncture buying a revenue stream.
So it really is product focused. And your last question on a dividend.
Companies that have there's number of tech companies with high growth that have strong business model that have started dividend. We're not aware of any SaaS company though that certainly at our growth level that has initiated dividend.
And the consensus from our key investors at this point in time is you know continue to execute as you have, to continue to direct your cash resources to that investment. So that's something that at a later time there might be some consideration, but at this time there is no consideration on the dividend.
Operator
Next question comes from Deepak Kaushal with Stifel/GMP.
Deepak Kaushal
Got a couple of questions first one on the margins I'm trying to parse out in your guidance and your outlook, what's changing in terms of structural margin versus cyclical. It doesn't seem like the swing through the cycle in margins in the last cycle which was bigger the one we're expecting going forward.
Certainly if you expand internationally you have to add more data centers and now you're adding a dedicated sales team for existing customers. Does it structurally change your margins long-term?
Richard Monkman
Well we do have significant leverage in our business model and the - so let me when you say our margin I’m going to first sort - the first focus on the gross profit, So general you know gross margin, if you will. And that yes we are investing in data centers and we continue to expand that.
We do so for two reasons. One is not only to support our expanded customer requirements, but also by way of showing and demonstrating our commitment to our different theaters.
So that's the reason for the two data centers that we brought on in the last couple of years and in Japan as well as in Europe and a significantly expanded capabilities in North America. We're going to continue to invest there.
The other big operation another cost is global support. And we have consciously also pushed out global support into our theaters so that we have people not only in the same time zone but in the same language capabilities and so on.
Now these are bit of step functions. And so you know there's going to be - we anticipate higher yield over time.
But it's important to make sure that we demonstrate our commitment and support to those customers. And the last component is professional services.
The Professional services capabilities tend to move in line with the underlying revenue. The other margin going down to - and this is where sales and marketing expense would be down to the adjusted EBITDA, if you will.
And again, we've commented there how we are continue to accelerate our investment in sales in marketing just because we feel it’s so important to you know again on a global basis have enhanced capabilities to work with our expanding mix of customers. So, I think you'll see over a period of time that those margins are relatively in line.
But what you will see is from a core basis there is some variability, I hope that helps.
Deepak Kaushal
Yes that helps. So when you when you expect to get back to normal margins in 2022, if we assume that that's a 30% EBITDA margin.
What would your gross margin level be at that time are you expecting it back at the mid 70% range or stay in the kind of [technical difficulty].
Richard Monkman
Well, first I do not mean to be arrogant and whatsoever, but I think that the 30% margin is quite exceptional and probably it’s not normal. I mean what we're talking about is moving to an EBITDA range of 22% to 23% which is still you know from a peer perspective very, very strong.
And yes, we'll see you know over that three-year cycle some variability on that. Just again primarily as an artifact of the subscription term license revenue, but when you look at over the three-year cycle, it's still continue to be very strong performance.
The point I was trying to make earlier with regards to leverage is that I think it's probably a reasonable assumption over time that our growth rate and revenue is certainly in SaaS revenue will probably be at a higher rate than for instance G&A. And so, you'll see that over time that leverage manifest itself in our operating results.
However, you know, we and I would say our investment community feels very important to continue to sustain focus on sales and marketing. So that is where whether it’s cash or from the P&L metric perspective we’re investing heavily.
Deepak Kaushal
And just my last question just going back to the Prana acquisition. In terms of need I know you mentioned that you need to support growing customer deployments but I mean how much of this was driven by a need for local presence because you only have one customer in India and are you getting a margin pickup on services through kind of an offshoring effect by adding the Prana team versus organically supporting services through to Canada?
John Sicard
Yes. So firstly you know having worked with the with this organization throughout 15 years I can tell you that their focus of supportive services has not been India.
They established a team in India, a skill set in India but they have supported our customers globally including in Europe and Asia Pacific. So largely I would say given their location and time zone it would be very helpful and in supporting our business as we grow in Europe and Asia predominantly where we’re focused.
Operator
Next question comes from Robert Young with Canaccord Genuity. Please go ahead.
Robert Young
Is that work starting on the new building in the background there?
John Sicard
Yes very good we’re trying to get them to stop.
Robert Young
That the building wasn’t good to be built for a while yet. So I wanted to ask a couple of questions on the backlog maybe continue some of the Paul’s question or maybe asking it a different way.
The growth in the backlog in Q4 you added a lot of backlog, you only announced two new wins, you had three renewals and so I guess the natural question there is given that you said two-thirds and the growth has driven by new logos, but it appears in Q4 that a lot of that growth was driven by the renewals versus new wins, is that correct or were there wins that just weren't announced and we wouldn't have known about?
John Sicard
Well, there are a number of wins that were not announced. And we work with our customers and a number of businesses.
We have their support to announce quite frankly what will happen is that generally it will take about three months. So an announcement that we may say in December is very well may have been with regards to a Q3 sale.
And I would say the majority of new name wins, we’re currently not making an announcement, but that will vary quarter-to-quarter. With regards to term you know some of our terms are three years or some are five years, and so from a contract that you know the minimum contract backlog all things being equal you know a five year deal is going to be significantly more than three years.
So the backlog reflects both the volume of business activity and the term and it is a pattern of not only the new wins, but then the renewals and the expansions there in, we are [technical difficulty] day one has been a land and expand type of model. So with what try to do is provide the best view in terms of that expansion of revenue between the - between those two areas.
Robert Young
Second question for me to be about the funnel, John you said that you'd see the opportunity to for sustainable growth in the SaaS business. You've you know clearly had a lot of backlog like I said there.
And so, when you look at the funnel, is the funnel do you see large deals in the funnel that will support wins in the future and I think you said that you know that you saw a lot of a growth in Asia and Europe. And so, when you look at the top of the funnel, would you say that it's - it's growing faster than the middle of the funnel?
John Sicard
Yes. So you know as it relates to the activity you know it's not just size and location.
You know I look at the quality as well and the actual activity and velocity quite frankly. So you know we have been investing heavily in sales over the last 24 months, as I mentioned and more than doubled the sales engine since the January of last year and we're continuing to push hard on that you know accelerate our investments if you will in that function.
And it's a reflection of the activity we're seeing you know in the - in the pipeline. What I can tell you is, you know certainly life sciences continues to be strong, CPG continues to be strong.
And I see you know I don't see any challenges as it - as it relates to concentration, whether it's concentration in market verticals or concentrations in geography. I would tell you that we've seen an acceleration in quality and health of pipeline in Europe and that's a reflection of our - of our investments there and our successes there.
You've seen some of the names; you’ve seen some of the names that we've recently posted. We can't post every customer name that's for sure as much as we would love to.
But we are definitely seeing you know activity in the pipeline and health of the pipeline that would, that would drive our continued investments in both sales and marketing.
Robert Young
And then just on that, the range that Richard provided 27% to 29% is little bit higher, is that an acceleration in sales headcount or marketing spend or is that a function of the top line just a little lower growth because of the gap on sub-term in 2020?
John Sicard
Yes, it's a combination of both. So it is increasing, but because it is a percentage of total revenue and you know with the lower level of subscription term license that it does have a bit of an amplification impact, but it is also very much you know real dollar, significant investment receivables as your model will show.
Robert Young
Any reasons to call though where that investment would fall? And then do the ranges include Prana and then I'll just pass the line?
John Sicard
Well Prana is primarily, because it is professional support people as well sustain support those costs are predominantly in the cost of revenue line. So they do not, they are not characterized in sales and marketing.
So the sales and marketing is the continued expansion of the teams globally. We have significantly increased the European team you know starting two years ago that has continued to grow.
Asia and new areas and team has expanded as well as just the core North American team. So it is a global expansion of the personnel and not only in quarter carrying individuals if you will, but because of the nature of the team sale and the enterprise sale and - we continue to sort of 18 months sales cycle is really the sales community.
So it is an industry professionals, it’s the technical professionals that work with them and then significant expansion in our marketing capabilities as well. So, those are - the increased capabilities that we've invest with them.
Robert Young
Okay. And then Prana’s in the gross margin guide you gave and then past line?
Richard Monkman
Yes.
Robert Young
Yes.
Richard Monkman
Is both in the revenue range as well as in the.
Robert Young
Great.
Operator
Next question comes from Suthan Sukumar with Eight Capital. Suthan your line is open.
Suthan Sukumar
You guys talked about and seeing and acceleration in pipeline in Europe can you touch on the level of maturity and involvement you're seeing with partners in growth markets overall. Are these relationships and their contribution progressing as planned the better or do you see an opportunity to accelerate further?
John Sicard
Certainly, Europe as a percentage of activity an opportunity for us reflective of our investments there, our growing team we put at data center in Amsterdam to host our European customers. Quite frankly we're really pleased with the growth and the expansion of the pipeline and the health of the pipeline in that region.
We don't generally comment on overall size as a percentage but I will say Europe is an area we see - a like continued contribution in our growth for 2020 and beyond.
Suthan Sukumar
And you guys also touched on being a focus on outpacing - competition on innovation. What are you seeing probably from an industry and competitive response to your recent product belief - and what’s been in the partner contribution to innovation to-date?
John Sicard
Yes, so we continue to believe that there really isn't anyone competing with us on the concurrent planning’s. What I describe is the technique of solving supply-chain problems more so than the technology.
This notion of end-to-end and inextricably connected concurrent planning is the technique that I would say the market is realizing it is superior to the legacy of approach of cascaded planning. And so - we're certainly seeing that in our growth.
We're seeing that in the pipeline and the activity and the maturity of prospects coming to see us about concurrent planning. We continue to see SAPs predominant incumbent, most of our customers the vast majority of our customers and prospects are on a SAP platform.
And again, we don't compete with SAP on their “platform” or ERP system, but certainly we work in lockstep with it. And so, we continue to outpace I believe their efforts and - as it relates to how we work with partners while we announced last year our investments in RapidResponse as a platform.
We announced that our - record breaking connections conference, the RapidResponse platform. We have what I would call some privileged, privilege to life partners that are very close to us working with us in a beta program with that platform.
And basically building, building intellectual property on top of RapidResponse. We’re also seeing customers in fact engage with us, very sophisticated customers engage in extending RapidResponse using the platform as well.
So it's early days in terms of predicting the monetization of that platform, but we're really pleased to see the uptake and interest from both partners and customers frankly. We're seeing it from both sides.
Operator
We have a question from Nick Agostino with Laurentian Bank Securities.
Nick Agostino
Yes, good morning, thanks for taking my questions. I guess two things first, just going back to product innovation, I think late last year you guys introduced the self-healing supply chain or at least brought it to the market.
And you spoke about the initial customer feedback and reaction. I just wondered if you can get an update there as far as what the take up is on those - on that module and what the interest level is looking like?
John Sicard
Yes, we're very excited obviously with our investments in machine learning and what we call automated intelligence. That team has been the fastest growing team quite frankly in our R&D facility.
And the notion of self-healing is very well received by senior level practitioners. They recognized supply chains as being a machine, machine that is designed by humans.
And yet, the notion of self-healing is to continuously monitor that machine, that machines behavior in the real world. And so self-healing the way we describe it is having that supply chain adjust and self-tuned based on the conditions of the road I leave that way.
We’ve expanded our capabilities in this calendar year. And so, far the beta programs are being extremely well received.
It’s very, very powerful. The self-healing technology runs continuously in the background 24/7 it’s continuously monitoring as demonstrated against as designed and predicting adjustments based on that.
So we're going to continue to invest heavily obviously in that function. But that's not the only area of innovation, RapidResponse is a platform as I described it’s really key to our long-term growth strategy and our entry into new markets.
You know partners being able to build their own intellectual property similar with force.com did for salesforce quite frankly this is the way I look at it. And so, we're pretty excited there we're anticipating another - another connections event with some significant innovations to announce.
So, yes we're pretty excited about what we're doing today and what's in the pipeline for tomorrow.
Nick Agostino
And then second question just maybe going back to the Prana acquisition and the timing on it. I believe a couple of quarters ago I think you had about 80 job openings that you guys were highlighting when I look at your website now I see about at least 40 on the site right now.
So I'm just wondering is this a case of you guys maybe adding positions or bodies and specifically within Europe and Asia maybe is going a little bit slower than what you are hoping for? And so the question really is did you guys go out from a buy versus build, you guys go out and seek Prana an acquisition or did they maybe approach you, so just trying to understand how that whole deal came about?
John Sicard
Yes so, again having known Prana and their founder for many, many years and I described this in earlier on the call the timing was really good for both parties. Our growth trajectories and need for talent frankly was a key element or a motivator for the acquisition.
And I can't stress this enough, when we talk about investing in the business. Even - overall as a company, we're expecting to see nearing 40% growth in headcount year-over-year.
This is a across - you know broadly across the business and that is a reflection of our confidence in what is happening in the pipeline? What is happening with activity and just making sure that we're prepared for success.
We certainly don't want to be one of those anecdotes where you know success is upon us and we're crushed by it. So, we're investing across the board to make sure that we're well-prepared.
And again, the timing was just right for us especially as it relates to growth in those two regions and their location and the skill, the cultural of that it was just an obvious thing to do.
Nick Agostino
Okay, can we assume that you may consider similar Prana transactions in the future?
John Sicard
As I mentioned on M&A and growth - our growth strategy is not to acquire revenue that's not how we think. We think about organic growth, we think about calling technical wide space that is a accretive to our markets, accretive to the customer base we have and certainly accretive to prospects.
So that's the way I would - characterize our M&A strategy. We have certainly been actively in looking and evaluating things, but again I will say - we do so with extreme rigor, extreme rigor.
And so, I - that's the way I would categorize it. That's the color commentary it’s really things that are technically accretive.
We will certainly continue to look at.
Operator
At this time, I will turn the call over to Mr. Wadsworth for closing remarks.
Rick Wadsworth
Thank you everyone, for participating on today's call. We appreciate your questions as always and your ongoing interest and support of Kinaxis.
We'll speak to you again when we report our Q1 results. Bye for now.
Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for participating.
You may now disconnect.